I joked on Twitter of creating an entire video for this session that just says “you can’t”.
But no, really, you can’t.
Trading in the market is a zero-sum game. When you sell a stock someone else is buying it. Sometimes you’ll sell a stock and make money at the cost of someone else. Sometimes you’ll sell a fund and lose money while someone else benefits.
The trick is you can’t predict the future to know how it’ll play out. You may think you know what’s going to happen, but there’s no way to know.
There are people who have beat the markets over a long period of time. For the most part, these people aren’t investing in stocks like you or me, but instead buying large pieces of companies that they have thoroughly vetted, toured, interviewed and researched. The Warren Buffetts of the world are the exception.
For most normal investors like you and me who aren’t trying to buy entire companies, there are a few ways we try to beat the market. Every single of one of these approaches looks and sounds great. They all have one thing in common – they underperform a portfolio with a buy and hold strategy using a basic index fund.
So what are the ways people try to beat the market?
#1 – They invest in individual stocks rather than buying the entire market (index funds). I’ve said it a few times already, but investing in individual stocks is extremely tough. Not only do you have to pick the right company, but you also have to pick the right time to start investing and the right time to sell. You have to be right at about 3 things!
Remember how with the S&P 500 fund it spends almost 60% of the time within 5% of its all-time high? Because of that, you don’t need to worry as much about picking the right time. Index funds are the way to go here for sure.
#2 – Next, they try to time the market. They see that the market has dropped and they decide to buy – or they see that it jumped in value and they decide to sell. Trying to time the market means you think you know what the future holds. Maybe you’ve read a bunch of blogs or watched CNBC and they keep mentioning that a recession is coming. You act on this and sell everything. You intend to rebuy into the market after the crash and laugh all the way to the bank.
That seems great, but you have absolutely no way to know if or when the next market downturn will happen. Every year there are hundreds of articles and interviews given detailing how the recession is happening any day now. Don’t trust these people! You should absolutely be prepared for your portfolio to drop in value, but you can build that into your risk tolerance by investing in more conservative or aggressive things. That’ll enable your portfolio to grow without the need to constantly tweak it.
#3 – One part of investing that was tough for me to wrap my head around was the idea that I was no longer in control. With money in my savings account and checking accounts I could go to sleep and wake up knowing it would be there, but with investing accounts that’s no longer the case.
Everyone responds differently to this loss of control when they start investing. Some people obsessively check their portfolio to see how it’s doing. Others try to constantly tweak their portfolio to optimize it – thinking that their actions will have a major impact. Once you get the basics right, there’s very little you can do that will make a major impact.
While you’re learning how to invest you may want to tweak your portfolio often to put into practice what you’re learning. I’d encourage you to try this, but in your tax-advantaged account, like your 401k or IRA. Constantly tweaking investments in a taxable account could involve a heavy tax bill.
Once I became more confident in what I was investing in, I made far fewer changes. Nowadays I hardly touch my accounts, other than to rebalance them every few months.
#4 – They trust “experts”. The stock market is complicated, so it makes sense to assume that investing should be complicated. If something is complicated, that means you’re more likely to trust to experts. It’s likely why you bought this bootcamp. My hope after you complete this bootcamp is to understand that investing is so easy, you’d feel confident teaching someone else how to invest.
There are a lot of experts out there that tell you they’ll be able to outperform whatever way you’re currently investing. Financial advisors promise they’ll outperform your current methods. Robo-advisors promise tax-efficient investing that beats the markets. Hedge fund managers promise their returns are amazing. Most even show convincing graphs depicting how their recommended way has beaten the market.
There are two things to consider about every one of these “experts”:
The first is that they’re out to make money off you. Sure, there are good financial advisors, but those ones never make promises, and they usually charge a flat fee for their services. The predatory advisors can make a LOT of money off uninformed people with money. If you do invest with an advisor I’d encourage you to understand everything that your expert is doing and make sure they have a fiduciary duty to you.
The other thing to consider about experts is what they’re comparing their performance to. They’re not going to choose a comparison that sheds a negative light on their solution. If they’re not comparing their solution to the S&P 500 or to a diversified portfolio then they’re likely hiding something.
So you might be thinking, why trust what I’m saying and not experts. Well, for one, I’m not recommending a specific course of action. This Bootcamp is a guide to help you understand how to invest so you can choose your own route forward to invest.
Whether you use index funds or stocks; whether you invest with Vanguard or Fidelity; I won’t make any money from your decision.
The best investments are the ones you can make and then forget about. Ones that you’re so confident in that they don’t keep you up at night or give you anxiety just to think about.
Nothing in this bootcamp includes a promise of future returns. Instead, it’s learning a way of investing that focuses on growing your wealth with minimal involvement.
Risk comes from not knowing what you’re doing.
If you’re investing in things you don’t understand, or don’t understand how they fluctuate in value, you’re taking on more risk. The same is true if you’re trusting a financial advisor to do all of the work for you. Even if they’re a family friend or someone who you have a long-term relationship with, I encourage you to use this bootcamp to fully understand what they’re doing. It helps lower your risk.